National Tamers versus Global Tigers
Chapter 5: The crises of global finance
5. The crises of global ﬁnance Madamina, il catalogo è questo. [Madam, this is the catalogue.] Lorenzo da Ponte (1787) from the libretto of Mozart’s Don Giovanni Financial markets are markets in information, and information by its nature is asymmetric and incomplete. It arrives on an unpredictable schedule and when it arrives markets react. Inevitably, then, sharp changes in asset prices – sometimes so sharp as to threaten the stability of the ﬁnancial system and the economy – will occur from time to time. Barry Eichengreen (2002, p. 4) 5.1 HOW MANY CRISES? Financial crises with international repercussions have occurred throughout the history of the world economy, well before the word ‘globalization’ was coined and circulated in print.1 International lending, sometimes with unpleasant consequences for the institution providing the credit or for private investors, is nothing new. The examples abound.2 In 1343 the Florentine banks of Bardi and Peruzzi failed after King Edward III, to whom they had lent large sums of money, refused to honour the Crown’s obligations, producing the ﬁrst case of sovereign insolvency with international implications.3 In 1720 the ﬁnancial ‘bubbles’ generated by the South Sea Company in England and by the Mississippi Company in France burst, precipitating severe crises in the London and Paris stock markets and sending out international shockwaves.4 A more systematic analysis of crises from the inception of the Gold Standard (around 1880) to the end of the twentieth century reveals that episodes of severe ﬁnancial turbulence, aﬀecting the exchange rate, the banking system or...
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